Finding Opportunity in the Cloud as Market Establishes New Economic Baseline

Includes: AAPL, NFLX, SINA
by: Jason Schwarz

It’s amazing how quickly the bearish sentiment takes over when the Dow is down 280 points as it was on Wednesday. Are we really headed for a deep, deep depression? Is recession right around the corner? The truth inherent in current economic data is that the Japanese earthquake had a larger impact on the global economy than anyone predicted, and the lack of a recovery in the U.S. housing sector continues to be a burden on employment.

Two weeks ago, economist Brian Wesbury warned that the one-off Japanese disaster that included an earthquake, tsunami and nuclear meltdown would have a lingering effect for the next few months, “Many manufacturers around the world rely on parts made in Japan. Japan’s manufacturing output declined 15% in March. To put this in perspective, it’s a larger plunge than the U.S. has ever suffered since at least 1921, and that includes the Great Depression and the immediate aftermath of World War II. As a result, many U.S. auto plants have temporarily shutdown already due to a lack of parts and others are moving their usual summer retooling-related shutdowns into the spring.”

In addition to Japan, we all know that housing remains as a worsening economic data point in terms of rate of change. Everyone wants to see continued economic improvement but we will not get it without an uptick in construction. Rather than come to an extreme conclusion that this is the beginning of a Great Depression, it’s more prudent to claim that we are simply seeing a consolidation phase that is triggered by a short term one-off event and a long term variable that has been with us three years.

As the market establishes a new economic baseline, we will keep 50% of the portfolio in cash and use the other 50% to take advantage of special opportunities in the cloud sector. Apple (NASDAQ:AAPL) and Sina (NASDAQ:SINA) were both resilient in the face of Dow -280. Apple was down only $2.30 and Sina finished up $1.20. Wednesday’s action in the aftermath of Apple’s up $10 on Tuesday is representative of tremendous follow through.

Obviously the big money is encouraged by the prospects of the iCloud. The only real development of the day was the leak that Apple is quickly looking to strike deals with the movie studios in order to include movie streaming with iCloud. Netflix (NASDAQ:NFLX) was down $3.50 on the day. The shortest line in the world is made up of those who have made money from Netflix puts. Could iCloud put a dent in the Netflix growth story? This stock is trading at $267, near its 52-week high. It might be the perfect hedge in case economic volatility threatens an Apple / Sina run.

If Apple does decide to compete directly with Netflix it will cause Netflix’s other weaknesses of sky high costs related to international expansion, as well as sky high costs of securing content to become potential stock moving variables. When all is said and done, Netflix has no moat around its business model. The Albanian Army dog tags that CEO Reed Hastings wears around his neck will prove to be prophetic. We need to see at least $10 of downside conviction before entering any Netflix puts, but when you have a $270 stock there is a long way to drop.

Disclosure: I am long AAPL.